The Monetary Policy Committee of the State Bank cut its benchmark policy rate by 150 basis points, which is about as deep a cut as could be expected, even though the inflation rate is low enough to justify a much deeper cut. However, such drastic measures are not dictated by the circumstances. The decline in inflation has been precipitate, which implies that a deeper rate cut might not prevent the inflation genie from escaping the bottle. Further, with a possible increase in the General Sales Tax, the policy rate needed to be set with the probable inflationary effects in view. Then there is the factor of oil prices: the cuts in production agreed for 2024 by OPC+ mean that the government cannot depend on further relief from international oil prices; indeed, that relief could well be reversed.
However, the National Economic Council held its pre-Budget meeting and approved a development budget of Rs 3.792 trillion. It set an inflation target of 12 percent. That is where the policy rate should be, around the time it is achieved. The good news for the government would be that if the rate was achieved, and the policy rate cut accordingly, that would allow the government to pay less interest on its debt, thus easing the budgetary pressure on it to some extent. At the same time, it would be only appropriate for Finance Minister Muhammad Aurangzeb to remember that an important part of his job is preventing cuts in the Public Sector Development Plan. Already, the targeted growth of 3.6 percent seems anaemic, not just by the needs of the populace, but also by historical trends. It should not be forgotten that Investment + Savings = Gross National Product. Investment includes government development spending, so if the PDSP is cut, GDP growth is reduced. The government doesn’t want that.
At the same time, it does not want inflation making a comeback. If the country had been in a recession, or even a depression, it might have taken the risk. However, pump-priming is something the IMF will not stand for. At the same time, Mr Aurangzeb would do well to keep reminding himself that everything is interconnected. The PSDP must be maintained if growth is to be achieved, and for that, inflation must also be contained, so that interest rates can be brought down, both for the government and private-sector entrepreneurs. It is no easy task, but it is not impossible.
